An externality is an economic effect generated by an outside event or activity that is not directly related to the main event it is associated with. It can have positive or negative effects, and arise from production or consumption activities. They are not typically accounted for in markets, hence their external nature.
For example, pollution generated from burning fossil fuels is an example of a negative externality. The burning of fossil fuels is a primary source of energy for many people and creates a market for energy production and consumption. But it also causes residual environmental damage from the by-products of the burning process.
Likewise, a positive externality can be beneficial to society. For example, the medical research done by pharmaceutical companies creates advancements in treatments and cures that can help people in unexpected ways. Even though pharmaceutical companies do not directly factor in such benefits, they still result as a byproduct of their research.
Externalities need to be addressed to protect the health and welfare of societies. Governments and companies can work together to address these externalities in various ways such as through taxes and subsidies, or by instituting or incentivizing programs or behaviors that reduce or mitigate their effects.
It is important to note that externalities have an economic impact, but are also deeply social and moral. In other words, markets may not properly account for the costs and benefits of externalities, but people usually do. Thus, they become an important consideration in a well-rounded approach to ethics, economics, and public policy.
For example, pollution generated from burning fossil fuels is an example of a negative externality. The burning of fossil fuels is a primary source of energy for many people and creates a market for energy production and consumption. But it also causes residual environmental damage from the by-products of the burning process.
Likewise, a positive externality can be beneficial to society. For example, the medical research done by pharmaceutical companies creates advancements in treatments and cures that can help people in unexpected ways. Even though pharmaceutical companies do not directly factor in such benefits, they still result as a byproduct of their research.
Externalities need to be addressed to protect the health and welfare of societies. Governments and companies can work together to address these externalities in various ways such as through taxes and subsidies, or by instituting or incentivizing programs or behaviors that reduce or mitigate their effects.
It is important to note that externalities have an economic impact, but are also deeply social and moral. In other words, markets may not properly account for the costs and benefits of externalities, but people usually do. Thus, they become an important consideration in a well-rounded approach to ethics, economics, and public policy.